Ingevity Corporation (10-Q): Quarter ended June 30, 2019
Business context: Ingevity manufactures specialty chemicals and activated-carbon materials through Performance Materials and Performance Chemicals. The quarter includes the Caprolactone Business, acquired February 13, 2019, within Performance Chemicals. Amounts are in U.S. dollars; financial results are unaudited.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $352.8 million | $308.6 million | $629.6 million | $543.8 million |
| Gross profit | $134.4 million | $115.5 million | $231.5 million | $200.6 million |
| Income attributable to Ingevity stockholders | $56.8 million | $46.7 million | $79.5 million | $77.5 million |
| Diluted EPS | $1.34 | $1.10 | $1.88 | $1.82 |
| Adjusted EBITDA (non-GAAP) | $108.3 million | $89.4 million | $191.8 million | $156.5 million |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $71.5 million | $71.1 million |
Q2 gross margin was approximately 38.1%, compared with 37.4% a year earlier; first-half gross margin was approximately 36.8%, compared with 36.9%. Q2 sales rose 14%, driven by volume growth and favorable price/mix, partly offset by foreign exchange. Q2 net income attributable to stockholders rose $10.1 million, supported by higher gross profit and the absence of noncontrolling-interest earnings after the 2018 buyout of the remaining Purification Cellutions stake. For the first half, acquisition costs and higher interest and SG&A largely offset gross-profit growth.
Cash, debt and liquidity: Cash and cash equivalents were $53.3 million at June 30, down from $77.5 million at December 31, 2018. Total debt, including finance lease obligations, was $1.393 billion gross ($1.386 billion net of debt issuance costs), versus $758.9 million gross at year-end. The increase principally reflects acquisition financing. The company reported $490.6 million of available revolving-credit capacity. Current assets were $491.6 million and current liabilities $216.0 million. First-half investing cash outflow was $599.3 million, including $537.9 million paid for the acquisition; financing cash inflow was $504.8 million. Capital expenditures were $57.7 million.
Material changes and operating trends
- Performance Materials Q2 sales increased 28% to $123.1 million and segment EBITDA increased to $49.3 million from $42.7 million, with automotive emissions-control demand and pricing/mix gains.
- Performance Chemicals Q2 reported sales increased 8% to $229.7 million and segment EBITDA rose to $59.0 million from $46.7 million, including acquired Caprolactone sales of $34.3 million. On a pro forma basis including both acquisitions for the comparable periods, Q2 sales fell 10% and segment EBITDA was $59.0 million versus $61.2 million; lower volumes, particularly in industrial specialties, were the main pressure.
- The Caprolactone acquisition’s preliminary purchase price was $652.5 million, less $113.1 million of assumed debt settled at closing. The purchase-price allocation remains preliminary. First-half acquisition and related costs were $32.0 million, including a $12.7 million purchase-price hedge loss and $8.4 million inventory step-up expense.
- Net interest expense increased to $13.1 million in Q2 from $7.8 million and to $24.2 million for the first half from $13.9 million, reflecting increased borrowings. The company reported covenant leverage of 3.4x and interest coverage of 10.4x at June 30 and stated it was in compliance with covenants.
Outlook, risks and contingencies
Management reaffirmed fiscal 2019 guidance of net sales of $1.30–$1.36 billion and Adjusted EBITDA of $390–$410 million. It expected operating cash flow of $290–$310 million and capital expenditures of $110–$120 million. Management cited anticipated growth in Performance Materials and pavement technologies, with benefits partly offset by weaker industrial-specialties volumes, cost pressures, and planned outages. The filing does not provide a GAAP net-income reconciliation for projected Adjusted EBITDA, citing the inability to forecast certain components without unreasonable effort.
Risks highlighted include lower vehicle sales or production, raw-material and freight costs, crude tall oil supply, oil-price-driven oilfield demand, foreign exchange, Brexit and trade/tariff developments, and acquisition integration and realization of expected benefits. A 100-basis-point increase in floating rates was estimated to raise annual interest expense by approximately $10.1 million before hedging effects; the company had entered interest-rate swaps to fix rates on a portion of debt. Routine litigation was reported as not material, and management reported no material changes to the risk factors in its 2018 annual report.
Important facts for investors to verify
- Whether the acquired Caprolactone Business meets integration and performance expectations, and how final purchase accounting changes acquired asset values, goodwill and amortization.
- Whether reported growth translates into underlying growth: pro forma Performance Chemicals sales and EBITDA declined year over year, principally due to volume weakness.
- Progress against fiscal 2019 sales, Adjusted EBITDA, operating cash-flow and capital-spending guidance, including the effects of acquisition-related costs and planned outages.
- Debt, interest expense and covenant headroom as borrowing levels remain elevated; verify the rate exposure and impact of hedges.
- Working-capital demands: receivables and inventories increased, while first-half operating cash flow was nearly unchanged year over year.